Credit score not only factor
October 25, 2012
FORT JACKSON, S.C. -- Does a great credit score mean a person has a strong and stable financial position? Does being approved for a loan mean that the borrower can afford it? No, not necessarily. Although excellent credit can serve as a tool for some of life's financial goals, it does not necessarily mean that the household pocketbook is in order nor that borrowers can afford every approved loan that is offered.
A credit profile is made up of various factors that help lenders ascertain the level of risk they take on when loaning money to an individual or business -- not necessarily the borrower's ability to afford the loan. This is an important difference. Depending on the creditor, the lender may not even know if the potential borrower can afford the requested loan. Rather, lenders merely estimate how likely they are going to be repaid in a profitable manner based on the repayment probabilities of an applicant's particular risk class and other criteria.
Why is this important? In light of current economic challenges -- to include the DoD's recent release that delinquent debt is now the Number One cause for security clearance denials -- military families need to understand the real risks of taking on debt and that lenders aren't necessarily as interested in seeing if the loan is in the best interest of a family as they are concerned about their ability to make the loan profitable.
Families that are looking to take on new debt are advised to speak with an ACS financial counselor to gain added perspective on their ability to afford a new obligation. Often, families do not account for many of the periodic expenses in their lives such as car parts or the sofa that needs to be replaced.
Although credit is an important component of financial health, increasing net worth and balancing the budget so that a family can be certain to have shelter and food during tough times is a much more sustainable approach to measuring economic health. For this reason, the household budget and balance sheet should take front stage and credit scores could be seen with more objectivity by some.
Questions such as, "Are we setting aside more than we are paying out?" and, "Are we prepared for unforeseen emergencies and long-term goals?" might reveal a more accurate measure of economic progress at home than the latest credit score.
To discuss these and other financial concerns, call ACS Financial Readiness at 751-5256.